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Wall Street sets records as euro falls after US-EU trade agreement

Investors welcomed a new trade agreement between the U.S.A. and European Union cautiously, as the markets began a week of intense activity.

The STOXX 600 reached a four-month peak with a 0.5% increase, while the euro fell 0.7% against the US dollar. This was the biggest blow to the 10% rally this year since May.

The EU will spend $600 billion in U.S. investment and impose a 15 percent import tariff on the majority of EU goods. It will also open up important parts to its market.

Chris Turner, an ING analyst, said: "The deal is much better than the 30%-50% tariff rate that was threatened in the last few months. However, it is likely to be as bad as universal tariff rates discussed late last year."

The U.S./EU agreement averts a potentially damaging standoff between two blocs that account for almost a quarter of global trade. However, a number European capitals have complained about its lopsidedness in favor of Washington.

There are still major deals to be finalised before Trump's deadline of August 1.

The U.S.-China talks in Stockholm, Sweden on Monday should lead to an extension of the 90-day trade truce between the two countries. Meanwhile, the deal struck by Europe follows the one with Japan last weekend.

MUFG FX Strategist Derek Halpenny stated that the EU deal is ultimately "good from a perspective of financial markets as it further reduces uncertainty ahead of the 1st August which now looks like an insignificant day".

Apolline Menut, fund manager Carmignac, called it a victory for the U.S. given the forced purchase of U.S. military and energy equipment and the zero tariff retaliation from Europe.

She said: "This isn’t a breakthrough in trade - it’s damage control to the benefit of diplomatic pragmatism." "The economic costs may be painful, but the strategic calculus remains brutally rational."

The export-heavy DAX in Germany and the CAC 40 in France had both risen initially, but had slid back into negative territory early afternoon trading. Meanwhile, S&P 500 futures and Nasdaq's futures indicated that Wall Street would resume with new record highs.

As Asian markets reopened the euro also gained strength, but fell further into the red when the dollar pushed higher across the board.

The yields on government bonds in the Eurozone, which is a proxy of borrowing costs, have also been pushed down.

The benchmark yield for the euro zone, Germany's 10-year bond, fell 0.5 basis points to 2.71%. It had risen more than 10 basis point at the end last week, when the European Central Bank tempered talk of rate cuts imminent.

FED, BOJ AWAIT

The S&P 500 futures, Nasdaq, and Dow were all between flat and 0.3% up as the EU deal signed at Donald Trump's golf club in Scotland over the weekend added to the ones that were struck in Asia with Japan, Indonesia, and the Philippines last week.

Morgan Stanley analysts said that the likelihood of the S&P reaching its "bull case" by mid-next year of 7,200 points had increased, but was still "not without risk" due to possible tariff-driven inflation and high U.S. long-term bond yields.

Overnight, MSCI’s broadest regional share index ended 0.3% lower, while Japan's Nikkei fell more than 1% from its one-year-high last week.

The Australian dollar was trading at $0.657 and hovered around its near eight-month high.

Traders also await interest rate decisions by the U.S. Federal Reserve and Bank of Japan. They are also looking forward to monthly U.S. payrolls and earnings of megacap companies Apple, Microsoft and Amazon.

Investors will need to pay attention to the comments of officials to determine the future interest rate path. The BOJ can now raise rates this year because of the trade agreement with Japan.

The Fed will likely be cautious about any further rate cuts, as they are awaiting more data on the impact of tariffs and inflation to make a decision.

Trump has repeatedly criticized Fed Chairman Jerome Powell's refusal to cut rates. Two Trump-appointed Fed Board members have outlined reasons to support a rate reduction this month.

Oil prices have risen in commodities after the U.S. EU trade agreement. Brent crude futures as well as U.S. West Texas Intermediate crude both rose 0.5%.

On reduced demand for traditional safe-havens, gold prices fell 0.1% to $3.334 an ounce. This is their lowest level in almost two weeks.

(source: Reuters)